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The case in hand is an appeal made by Paramount Communication Inc. against the injunction order passed in the lower court restricting the Paramount Communication Inc. and Viacom Inc. merger agreement. The plaintiff in the lower court of Chancery had pleaded that an injunction order should be passed against the merger agreement between Paramount Inc. and Viacom Inc. as the conditions of the agreement were defensive and prohibited the plaintiff (QVC Inc.) from competing as a merger with Paramount Communication. The Supreme Court of Delaware thus stated that any merger agreement between a Target company and an acquiring company poses any restriction to the acquiring company’s directors from upholding their fiduciary duties towards its shareholders shall be considered to be void. Thus, the injunction passed by the lower court of Chancery is appropriate in its decision and the Merger agreement between Paramount and Viacom shall be void.
Statement of Facts
The facts of the case revolve around three big companies, Paramount Communications Inc. was interested in merging with any other company in order to keep updated with the technological advancements and be active in the market. Paramount held over 118 million shares outstanding. So, Paramount Communication Inc. sent their first tender in 1989 for merger and acquisition with other companies but it was unsuccessful as no bid was made. Then, another tender was offered by Paramount in 1993 for possible merger and acquisition targets in order to remain competitive in the market and a meeting was conducted with the CEO of Viacom.
A discussion was held regarding the merging of Paramount with Viacom and the CEO of Viacom offered $61 per share to Paramount which was to be paid in cash and part of Class B non-voting stocks. The discussions between Paramount and Viacom dropped to a dead end as there were three main clauses added to the agreement by Viacom and simultaneously another bid was offered to Paramount by QVC Inc. who also showed its interest in acquiring Paramount. There were discussions between QVC and Paramount, but Paramount denied to QVC in 1993 and agreed to the original terms of the agreement between Paramount and Viacom along with the three additional terms added by Viacom. The three terms added by Viacom were-
- No-shop provision- this provision avoided Paramount Communications Inc. from soliciting to other bidders, once the agreement was signed with Viacom
- The termination fee was added- in case, if it was found that Paramount had solicited other bidders regarding shares and merger purposes and outbid Viacom, then a termination fee of $100 million would be charged by Viacom as compensation from Paramount.
- Stock option allotted- as per this provision, a stock option was allowed to Viacom to purchase 19.9% of Paramount’s shares at the rate of $69.14 per share. This option also permitted Viacom to make payments to Paramount for the stocks in Subordinated notes (unsecured bonds) or Viacom could elect to get a cash payout for the difference between the option price and market price.
These options were vital for Paramount as its shares rose suddenly and it would have led to $500 million payouts to Viacom if the merger came into force. But QVC made another bid against the bid of Viacom by offering $80 per share which was way more than offered by Viacom. Thus, Viacom was forced to renegotiate its terms with Paramount and raised its offer to $85 per share. Although, nothing was discussed regarding the three defensive measures in the new agreement. QVC further raised the offer to $90 per share but Paramount refused to discuss their terms with QVC believing that their offer was too conditional and similar to Viacom’s offer. And the Board of Paramount didn’t discuss the terms of QVC due to their no-shop provision and the Board of Directors was of the opinion that a merger agreement with QVC would not be in the best interests of the Company. Thus, the Board turned down the offer on QVC and accepted the offer of Viacom, but it should be noted that Paramount could have easily earned $1 billion more if they had accepted the offer on QVC.
Thus, a suit was filed by QVC pleading for an injunction of the merger agreement between Paramount and Viacom stating that it was not in the best interest of the shareholders of Paramount. And the lower court of Chancery gave the order in favor of Plaintiff (QVC Inc.) granting a preliminary injunction on the agreement between Paramount and Viacom. Thus, the defendants (Paramount) filed an appeal in the Supreme Court of Delaware against this injunction.
Issues of the Case
The present case deals with many issues at hand, but some of the major issues of the case are-
- Whether the terms offered by Viacom in the original agreement with Paramount were void in nature?
- Whether the Paramount Board had violated the fiduciary duty towards their shareholders by not completely considering the offer of QVC?
Hence, these are the 2 primary issues discussed by the Supreme Court of Delaware within the case.
Contentions/ Arguments from both the sides
There were contentions presented by the appellant as well as the respondent before the Delaware Supreme Court. The Court firstly pointed out that there was a breach of fiduciary duties of Paramount Board on the following grounds-
- To be diligent and vigilant while examining their Paramount and Viacom agreement and the simultaneous QVC tender offers
- To act in justice, equity, and good faith with the offer presented by QVC.
- To rightfully obtain all the material information reasonably available including the information necessary to compare both the offers for determining the transactions and alternative course of action i.e. beneficial for the stockholders of Paramount
- To actively negotiate with both the companies who brought in the offer of a merger with Paramount in a bonafide and impartial manner
The Court was of the view that the Board had failed to execute its duties owed towards their shareholders and was under the obligation to assess the change of control premium, the Stock option agreement, the termination fee to be charged, the coercive nature of both the tender offers of QVC and Viacom, the no-shop provision and proposed disparate use of the Rights Agreement with respect to Viacom and QVC offers.
Regarding this view of the Court, Paramount presented its contentions in defense that the contractual provisions included in the Merger Agreement between Paramount and Viacom such as the no-shop provision which precluded them from negotiating the offer with QVC Inc. or seeking alternatives and thus led to the mentioned breach. So, the appellants contended that it wasn’t an intentional breach but due to their contractual conditions. But the Court stated, that these provisions didn’t validly define or limit the director’s fiduciary duties as per the Delaware Law or prevented the Directors from carrying out their fiduciary duties and such provisions limiting the power of Directors would be deemed as invalid or unenforceable.
Viacom also averred that as the contract was signed by both parties, it had certain “vested” contract rights with respect to the No-shop provision and the Stock option Agreement. Viacom stated that Paramount was obligated to abide by the contractual terms and conditions as they had agreed to the Agreement. But as the no-shop provision and Stock option agreement were declared invalid by the Court, there was no question of having any vested contractual rights over Paramount and likewise, Paramount directors could not contract their fiduciary obligations via any contract.
Further, the Court even questioned that how did Viacom being a qualified company with an experienced legal and financial advisor could demand such unreasonable features of the Stock option agreement, no-shop provision, and termination fee and hence the Court didn’t find any merit to the contention of Viacom, that they had vested rights over Paramount by making the Board act in a manner which would lead to the violation of their fiduciary duties.
Summary of Court decision and Judgement
There were certain principles laid down by the Supreme Court of Delaware while dispensing the order for the present case.
- The first principle was regarding the significant sale or change of control that would have an adverse impact on the interests of Paramount’s shareholders as it would lead to concentration of voting rights in one hand (one entity) if the agreement was allowed to be permitted between Paramount and Viacom. And if the control of the company was sold to Viacom, they were obligated to pay a control premium to the minority shareholders. Viacom and Paramount merger would majorly cause losing of the voting power of the minority stakeholders as 51% of the voting rights would go in the hands of Viacom post the execution of this Merger agreement. Thus, it could be detrimental to the voting rights of minority shareholders.
- Another principle looked upon by the Court was that there was the absence of control premium and the Paramount Board should have been diligent and genuine regarding their obligations and take maximum advantage of the situation by providing the best offer to their shareholders.
- The court even mentioned certain obligations of Directors, stating that they owed a fiduciary duty of loyalty and care towards their shareholders in the event of sale of control of the Company which they were unsuccessful in adhering to.
The Court even imposed enhanced judicial scrutiny, as the main grounds for mandating scrutiny was that there should threaten reduction of the current stockholders voting power, it should be considered that an asset belonging to public stockholders was being sold to one single entity and may not be available again or even traditional concern of Delaware Courts for actions which impair or hampers stockholder voting rights. In case, any of these conditions are being met then the Court may impose enhanced scrutiny on the parties. The trial court even examined whether the directors had perceived the interests of their shareholders while making a deal with Viacom. The Court even mentioned the features of an enhanced scrutiny test. They are as follows-
- There should be judicial determination regarding the adequacy of the decision-making process
- The examination of whether the director’s actions were reasonable in light of the present situation. The burden of proof lies on the director to prove that they had considered the interest of shareholders while making the Agreement.
The appellant, Paramount and Viacom had averred and quoted the judgment of Revlon and Time Warner that injunction and enhanced scrutiny was not valid in their present case, as they were not going through any liquidation process or break up. The Court thus, replied to this contention that break-up of the Company was not an essential ground for judicial scrutiny and granting an injunction and as the Company was shifting its control to another entity and it was at a position where Paramount had the opportunity to maximize their shareholder value and thus Paramount was under no obligation to avoid discussions with QVC due to the defensive terms of the Viacom’s agreement. No agreement had the right to remove the fiduciary duties of Directors owed to shareholders. Thus, the Court gave the judgment in favor of the Plaintiff and said that the Court of Chancery was right in granting the preliminary injunction.
Analysis of the Case
The case was well analyzed by the Supreme Court of Delaware and upheld the order of the Court of Chancery that the preliminary injunction was rightly granted to QVC Inc against the Merger agreement between Paramount and Viacom. The defensive measures incorporated by Viacom along with the sale of control and subsequent disparate treatment of competing bidders led to judicial scrutiny for this case and it was decided that Paramount Directors’ process was neither prudent nor in the interest of their shareholders as per the terms of Agreement. It was examined that Paramount Board lacked in its attention regarding the probable consequences of the defensive measures mentioned by Viacom and on top of it, there were no extra efforts made to modify or eliminate these defensive terms and instead, they blindly adhered to their vision of having a strategic alliance with Viacom.
The Court even analyzed the value of the revised QVC offer when it suggested $90 per share to Paramount and as in the current scenario, it must have exceeded the offer of Viacom by $1 billion and thus this seemed a significant discrepancy that could not be justified by the directors’ vision of future strategy with the Viacom company. Moreover, the Court questioned the uninformed process of their terms and conditions that deprived their strategic vision of its credibility with the Viacom Company. The Paramount directors didn’t negotiate the terms of QVC in the belief that it would breach the no-shop provision and even called it “conditional and illusory”. Therefore, Paramount lost its final chance to safeguard the interests of its shareholders by not making negotiations with QVC.
Thus, the decision rendered by the Court was in accordance with the existing law of the United States and the reasoning of the case is very well explained and logically applies to the principles mentioned by the Court. This decision will help the companies to know about their director’s fiduciary duties and they cannot be ignored or breached in case of any agreement also.
Thus, it can be inferred from the above judgment of Delaware Court that it was the primary duty of the Paramount Director to realize the best value of the stockholders as per the facts of the case. As the director’s obligation was not satisfied, it was rightly declared by the Court that Paramount Board’s process was deficient. It should also be noted that QVC’s offer was an unsolicited bid that presented a greater opportunity for achieving increased value for the shareholders and enhanced negotiating would have given more leverage to the Directors. But rather than seizing their chance of availing higher profit of up to $1 billion, the Paramount directors chose to blindly abide by the defensive measures mentioned by Viacom and refused to look into other alternative approaches. As this agreement was even clear about the sale of control, they should have first discussed their benefits arising out of the Merger Agreement with Viacom as they were transferring 51% of the voting rights in favor of Viacom. But, none of this was done by Paramount and hence the court had to impose an injunction on their one-sided Merger Agreement in order to protect the interest of Paramount’s shareholders.